BUS602: Marketing Management

Within forward distribution, we first provide an overview of prevalent concepts existing in practice and develop a typology. We then discuss the concepts within two subsystems, namely the OC dispatching location (=source of distribution) and the OC point of customer reception (=destination of distribution).

Omni-channel forward distribution typology

By analyzing the literature on related e-commerce retailing, practitioner reports, primary market data (e.g., webpage search, retailer reports) and ultimately the results of our interviews, we have been able to develop a comprehensive overview of forward distribution design concepts existing in practice. Figure 2 illustrates the different concepts of deliveries which are denoted from (1) to (6). They can be structured into the following overarching categories. First, store delivery (SD) represents traditional distribution concepts of bricks-and-mortar distribution resulting in in-store buying. Second, there are home delivery (HD) concepts, and third, different store pickup (SP) concepts. Thereby (SD) and (SP) have the bricks-and-mortar store as a destination, while (HD) serves customers at home or alternative pickup locations. Within each category there are different design possibilities which are summarized below.

Fig. 2 Typology of omni-channel forward distribution

These OC forward distribution types that exist in practice can be combined in a portfolio of delivery options. When defining the individual retailer's portfolio, the trade-off between service for the customer, required delivery velocity, processing costs as well as process complexity must be offset. As the forward distribution concepts combine of different dispatching locations and destination concepts, we will discuss these areas in more detail in the following two subsections. The qualitative analysis will help retailers to define their mix of OC forward distribution types.

Archetypes of omni-channel dispatching locations

OC retailers basically have three types of locations from which they fulfill customer orders. Direct customers, for example, can be supplied from a retailer's DC , one of its outlets, or directly from a supplier's DC. In contrast, store orders generally are supplied from a retailer's DC or a supplier's DC.

Retailers' DCs

Retailer DCs are the basic source for OC forward distribution concepts. They are used for store delivery in classic in-store buying concepts, as well as for home delivery (DC shipment) and click-and-collect. An OC retailer's DC structure can be further differentiated according to (A) the degree of integration of distance retailing and bricks-and-mortar DCs and (B) the level of centralization within the retailer's OC network.

When analyzing the retailer DCs, we initially have to distinguish between integrated and separate DCs. Integrated means that the retailer operates common DCs for both, bricks-and-mortar and distance retail, whereas operating channel-specific DCs is classified as a separate DC structure. Both types of DCs are equally common throughout all retail sectors surveyed.

Retailers establish integrated DCs for bricks-and-mortar and distance retailing because they allow them to leverage inventory pools and allocate inventories to stores and distance retail orders flexibly in the line with demand. This is especially important as online sales are still quite difficult to forecast due to high dynamics and the growth of e-commerce. Therefore, pooled DCs and inventories support the availability of goods. The Head of Logistics of a specialty retailer, that recently opened an integrated DC after previously operating channel-specific DCs, describes this well as follows:

    "Using centralized inventories allows us to postpone the inventory allocation for distribution as long as possible".

Other participants with integrated DCs see the advantages of having synergies across the entire supply chain that enable better coordination of inbound logistics and rapid allocation of goods to the channels with one inventory control system. Furthermore, integrated DCs enable picking capacity to be allocated more flexibly. According to the experts, it is easier to integrate the processes if the shipment sizes for direct-to-customer deliveries are similar to those for store delivery. This is often the case if retailers operate small outlets (e.g., shoe stores) and when the outlets are supplied very frequently (e.g., daily). Integrated DCs also offer advantages if they are the dispatching location in a click-and-collect concept. Click-and-collect orders can then be shipped as part of the regular bricks-and-mortar store delivery from the DC. A joint DC, therefore, offers cost advantages in the event of a high or growing share of store pickup, because shipment fees for click-and-collect parcels can be saved.

Former distance retailers have advantages in establishing integrated DCs compared to former bricks-and-mortar retailers, as they have the process know-how for the more complex task of handling direct customer orders in warehouse operations. Furthermore, integrative DCs can be established more easily if the products are applicable for handling in (semi-)automated picking and sorting machines. This requires relatively homogeneous products with regard to their picking characteristics. Shoe retailing is a good example of such conditions, as is fashion retailing in general. For other sectors, such as consumer electronics and especially DIY, the product heterogeneity in terms of the picking characteristics is a greater challenge. But strategies exist even for these sectors which support the operation of common DCs for both bricks-and-mortar and distance retailing. For example, a DIY retailer operates an integrated DC for storing and picking all those product ranges that are easily shippable in parcels. Nevertheless, regardless of the integration strategies, integrated DC locations for both channels increase the complexity of warehouse operations.

Separate structures are, therefore, a way for simplifying processes at the DCs. The COO of a fashion retailer explains the reasons for separation as follows:

    "We use a separate and external fulfillment center for our distance retail shipments. Our main business is in brick-and-mortar retailing. We do not have the experience for distance retailing nor the space in our DC for additional direct-to-customer picking processes. We treat the e-commerce fulfillment center like an additional store".

All participants with separate DCs argue with the process-related advantages of picking. Separate DCs simplify picking processes as these are different for customer packets vs. pallets for stores. This is especially true if the order volumes and the variety of different items within one order in distance retailing differ greatly from bricks-and-mortar store replenishment. The store order size depends on delivery frequency and ultimately also on store shelf space and the trade-off between inventory holding and transportation costs. For example, shoe retailers replenish their small stores daily. Small order sizes are shipped by parcel services just like for home delivery. In contrast, fashion retailers usually replenish their stores only once or twice per week with large order sizes. DIYs consolidate orders to minimize transportation costs (e.g., for bulky items) and use their large stores to hold inventory, whereas consumer electronics retailers replenish with high delivery frequencies and small order sizes to save the inventory holding costs generated by expensive slow-movers. The customer order size mainly depends on the product type. For example, basket sizes of consumer electronics are only a few items, whereas fashion retailers need to pick multiple items for one customer order. Some logistics managers argue that their bricks-and-mortar logistics system is simply not capable of additionally handling customer picking. This indicates that investments, especially in flexible or automated picking systems, are necessary for the execution of integrated DCs. If retailers try to avoid such investments, separate DCs are the logical consequence. The retailers with separate DCs also see the advantages in minimizing the risk when entering a new channel by using separate legal entities for each channel. Some retailers with separate DCs rely on external service providers for operating one of the DCs. However, as our focus is on physical flows, the responsibility for the DC fulfillment is rather a side issue and will not be differentiated in the following.

Summarizing the results of the above discussion, two types of DCs can be derived: separate channel-specific DCs and integrated omni-channel DCs. From a customer service perspective, integration ensures greater product availability. From an operational perspective, integrated DCs are preferable if the retailer fulfills the prerequisites for integration in terms of resources and capabilities in such a way that integrated operations can be executed efficiently. In addition, integrated DCs reduce transportation costs in a click-and-collect setting. Retailers can separate logistics to simplify structures and outsource ancillary functions to avoid investment risks. Separate distribution structures are, therefore, often an initial concept in OC forward distribution, whereas integrated DCs and consolidated inventories are advanced and more complex solutions. Table 1 summarizes these findings.

Table 1 Summary of omni-channel retailer DC integration levels

Integration level	Separate channel-specific DC	Integrated omni-channel DC
Advantages	Simplified operational processes; economies of scale through specialization	Bundling effects for inbound logistics; higher overall service level through pooling inventory; lower average inventory levels; no inter-warehouse transshipments; lower shipment costs when applying click-and-collect; economies of scale in warehousing; capacity balancing effects
Challenges	No cross-channel bundling effects for inbound logistics; higher average inventory levels; additional transportation costs for click-and-collect; inter-warehouse transshipments	Higher process complexity in picking and inventory management; higher space requirements at the DC; ability to execute heterogeneous orders efficiently
Contextual factors favoring the respective type of DC	Large difference in order sizes between channels; large outlets; heterogeneous picking characteristics; manual picking systems; origin in bricks-and-mortar business	Small difference in order sizes between channels; small outlets that are replenished frequently; homogeneous picking characteristics; products suitable for parcel shipment; automated or flexible picking systems; origin in distance retailing business
Development stage	Initial solution	Advanced solution

The second issue in the analysis of omni-channel DC structures is the level of centralization, i.e., the area in which a DC is responsible for supplying customers or stores. A distinction can be made here between centralized DCs responsible for a large part or all of a customer or store area and regional DCs responsible only for a specific area of customers or stores. Regional DCs usually keep fast-moving items in their inventories. Most bricks-and-mortar retailers rely on several regional DCs to supply their stores from regionally distributed locations, the purpose being to shorten replenishment time and decrease transportation costs. Conversely, centralized DCs mainly keep slow-moving items for pooling inventories. Most items are stored exclusively at one of these levels, i.e., centralized or decentralized. Items stored at a central DC are delivered directly to stores and customers. If at all, regional DCs are used only as transshipment points for such products.

Concerning the requirement of short lead times for direct-to-customer shipments, the unanimous point of view of all experts interviewed is that the lead time within European retail networks for next-day delivery within one country cannot be improved via decentralization by using multiple regional DCs that are closer to the customers. If a retailer's DC is close to a hub of a CEP, later cut-off times for orders can be realized, as transportation time between the DC and CEP hub is shorter. The goods can be shipped overnight and arrive at the customer usually on the next day. OC retailers argue that late cut-off points for orders are more important for short lead times than creating regional DCs. Nine out of ten OC retailers surveyed use one single DC for direct orders. This is also due to the fact that the capacity of one DC is still sufficient to meet distance retail demand for the majority of retailers. Therefore, the prevalent type of DCs for direct orders of OC retailers is one centralized location for one market. Only a few fashion retailers with mature structures in distance retailing operate multiple distance DCs.

The picture for bricks-and-mortar store distribution, however, is different. Most of the OC retailers use further regional DCs for store replenishment. This is due to the fact that most large OC retailers used to be pure bricks-and-mortar players, who have a high proportion of sales in physical stores, have developed mature forward distribution structures in this channel, and operate a significant number of stores. A central DC has lower store delivery frequencies on average to realize bundling effects for longer distances to the stores. However, as stores benefit from shorter replenishment cycles and higher delivery frequencies that enable faster reactions on demand development, OC retailers continue to rely on regional DC systems for their bricks-and-mortar business, as several experts interviewed claim. This enables shorter cost-efficient replenishment cycles for the major part of their store assortment. Regional DCs can be found in all sectors surveyed. In the DIY sector, regionalization is very prevalent, one reason being that a large proportion of the items sold at DIY stores are very space-consuming or have special storage requirements, which can be better managed with multiple storage locations (e.g., plants).

Table 2 Summary of centralization of omni-channel retailer DCs

Retailers' outlets

OC outlets are showrooms and DCs at the same time. Outlets as dispatching locations are relevant for home delivery as well as for the store pickup concept click-and-reserve. Dispatching from an outlet is also required when retailers transship between stores. Transshipments are often applied at the end of the season to reduce inventories and to avoid stockouts and high discounts on leftovers. The focus of the OC-related analysis, however, will be on dispatching customer orders at the stores.

Only one-tenth of the OC retailers surveyed regularly use outlets for distributing direct-to-customer shipments. The first type of OC retailers using this strategy already delivers items bought at the store to the customers. Examples of this type are the distribution of bulky goods in the DIY sector or white goods in consumer electronics. The product characteristics determine the distribution path, regardless of any OC activity. The second type of OC retailers operating customer shipments from the outlets is in sectors with large outlets, where every store represents a kind of warehouse. DIY, electronics, and department stores are typical examples. These retailers take advantage of the opportunity to offer a broader assortment via distance retailing if items are stored only at outlets. Fashion retailers, however, do not at present use the store as a dispatching location, although this might be an option for very large fashion outlets.

Forward distribution from the outlets increases the amount of handling effort at the stores and creates the need to establish processes to be able to handle distance retail orders efficiently. However, this will remain less efficient than order picking and distribution from the DC, as processes at the DC are specialized on parcel handling and the volumes that have to be handled are much larger. "In-store picking is our main cost driver as our outlets are optimized for presenting articles, not for efficient picking of online orders," argues a logistics manager at a department store retailer that already uses outlets for forward distribution. Furthermore, shipments from stores require real-time data access to store inventory and an integrated enterprise resource planning (ERP) system. In-store picking and packing also require dedicated space that cannot be used for the showroom. Store assortments are smaller than the assortment offered online at around two-thirds of the OC retailers surveyed. Deliveries from outlets to online customers, therefore, are very rarely applied by the OC retailers surveyed.

The challenges are similar when items are not shipped from the outlets, but reserved online by a customer and picked up at the store afterwards (click-and-reserve), as the IT requirements and the picking efforts are identical. Only the packing of a parcel is not required. Therefore, only about one-fifth of the OC retailers currently use this concept. However, click-and-reserve is expected to grow in importance, as it offers also several advantages compared to click-and-collect. It enables shorter order-to-delivery cycles than click-and-collect, as the desired goods can be picked up by customers immediately. Furthermore, click-and-reserve reduces the average transportation costs compared to click-and-collect. However, picking costs are higher at the outlets than at the DC. Click-and-reserve ultimately results in better product availability as orders can be supplied from both inventories at the DC and at stores. While click-and-reserve has been tested in most of the non-food sectors, it is only used to a very limited extent at present in fashion retailing because of several availability challenges. First, the high variation in cuts and colors leads to very few items being available in stores. This limits the number of available units for online reservations, since customers at the store may simultaneously be trying on these items or may have put them into their shopping basket. Second, items may be misplaced by store customers and their current location in the store might not be detectable with affordable effort.

Shorter order-to-delivery cycles are also an advantage for shipments from the outlet to customers, and they enable OC retailers to offer same-day delivery. This gives OC retailers a clear advantage in offering a same-day service compared to pure online retailers as they can leverage their outlets. Today all OC retailers' same-day orders are shipped from their stores. However, only about one-fifth of OC retailers place importance on same-day delivery. These have already implemented it or are piloting it for dedicated areas. Despite PR reasons, DIY and electronics retailers offer this service because customers might take advantage of same-day service in urgent situations, e.g., when working at buildings sites. However, the concept is not used in fashion retailing. Most OC retailers neither consider same-day delivery to be of value in future, nor have they implemented it or plan to do so. All retailers surveyed argue that customers do not expect same-day delivery services for non-food products and are only willing to pay for them to a very limited extent. Shipping fees, however, are high due to the increased effort required for processing and picking and the high costs of courier services, resulting in unprofitable same-day delivery concepts.
The third alternative dispatching location for customer and store orders is a supplier's DC. A customer or store order is placed at the retailer's interface and a supplier is responsible for the fulfillment. Such a strategy can be used for in-store buying, store pickup (click-and-collect) as well as for home delivery.

Summary of dispatching locations

Table 3 summarizes the findings on different dispatching locations and their impact on OC forward distribution design.

Dispatching location	Retailer DC	Store	Supplier DC
Advantages	Inventory pooling; economies of scale in warehousing and picking; reduced in-store handling effort; larger assortments/item ranges than in-store	Leveraging of store inventory for distance retailing; enriching delivery concepts with possibilities for click-and-reserve and same-day delivery; lower transportation costs applying click-and-reserve	Lower inventory and processing costs for retailer; possibility to enlarging assortment (bulky items, slow movers)
Challenges	Achieving efficient picking processes and economic inventory holding; shipment costs for click-and-collect to the store	Additional handling effort and two-stage picking (in DC and store); lower picking efficiency at store; store space requirement; real-time data exchange and IT requirements; higher transportation costs for home delivery	Higher lead times; advanced collaboration and data exchange with supplier required; lower customer convenience through limited options for order consolidation; potentially higher transportation costs
Forward distribution concepts	In-store buying; DC shipment; click-and-collect	Store shipment; click-and-reserve	In-store buying; Drop shipment; click-and-collect

Archetypes of omni-channel destination concepts

Optimizing of the "last mile" is the central driver for developments in OC forward distribution. A cross-channel shopping experience for customers generates opportunities for attracting and retaining customers. OC delivery modes need to fulfill customer requirements across the channels. A COO of a DIY retailer states that the main objective is "to create consistent, cost-efficient, and functioning delivery modes". This also changes the way the logistics department needs to think, as a Head of IT and Logistics at an electronics retailer that originates from bricks-and-mortar business denotes:

    "In multi-channel retailing, logistics is always in direct contact with our customers. Each mistake results in dissatisfied customers".

Besides traditional in-store buying, the archetypes of OC destination concepts can be divided into home delivery and store pickup. For non-food forward distribution, home delivery constitutes all delivery concepts that CEPs apply to bring parcels to the customers, e.g., to the door or to parcel stations. At least nine out of ten distance orders of the OC retailers surveyed are fulfilled via home delivery, but a growing importance is placed on store pickup, as the Head of Logistics of a fashion retailer describes:

    "Store pickup is our major growth driver. The additional process costs are justified, as store pickup increases customer frequency and opportunities for cross-selling".

Store pickup increases the variety of delivery modes for higher customer convenience by allowing them to choose the preferred delivery location. Ultimately, outlets can act as pickup locations as an alternative to a parcel station. Especially OC retailers originating from bricks-and-mortar business consider store pickup to be an essential format for OC distribution. It allows them to generate higher frequency at their stores. Furthermore, the additional assortment available for pickup enhances the variety of products in the outlets. Almost 70 % of the OC retailers interviewed have already implemented store pickup solutions.

As the online trade is growing, this strategy can also be used to stabilize declining bricks-and-mortar sales and increase store managers' acceptance of an integrated OC strategy. Originally bricks-and-mortar retailers, furthermore, have a clear competitive advantage regarding store pickup as they have a widespread store network. However, they usually do not charge shipping fees on store pickup to increase store frequency. Retailers, therefore, need to bear the shipment costs, if stores have to be supplied separately via CEPs, which is the case for all the fashion retailers surveyed. Stores with a sufficient number of items per SKU on stock at their outlets can, however, leverage their store inventory for distance retailing. A prerequisite for this is an adequate IT system. In particular the large stores in the DIY and consumer electronics sectors have the privilege of using this concept.

In contrast, from the perspective of former pure mail-order retailers, store pickup is generally a costly service. The costs come from the additional in-store handling effort compared to home delivery and margin losses through bearing the shipping costs instead of earning a fee from customers for home delivery. Store pickup is, therefore, offered, but not actively advertised by this type of retailers. This highlights one of the major drawbacks of additional delivery modes, "they are costly". Shipping fees are only relevant for direct-to-customer deliveries. The fees demanded from customers depend on the competitive environment and country-specific traditions regarding direct deliveries. For example, in Germany only some fashion retailers that compelled to do so for competitive reasons ship absolutely free of charge. The non-fashion OC retailers charge shipping fees in dependence of order value. The main reason mentioned by all participants is that shipping fees generate significant additional revenue for the retailers. As long as customers are willing to pay, they will impose shipping fees.

Table 4 summarizes the various aspects of the destination concepts. The delivery modes offered represent an additional service for customers which increases their convenience. This additional service is highly relevant with respect to customer satisfaction and loyalty. In the future, retailers will expand the variety of delivery destination concepts. Almost all OC retailers are currently assessing new forward distribution options and pushing for a convergence of distance retailing and outlet processing. The COO of a DIY retailer summarizes his effort in terms of delivery concepts in a way that also reflects the discussion above:

    "Our objective is to offer each delivery velocity and delivery service a customer wants to have and is willing to pay for".

Destination concept	In-store buying	Store pickup	Home delivery
Advantages	Direct customer contact; higher efficiency in DC picking and transportation; reduced risk for product returns	Direct customer contact; reduced risk for product returns; additional store frequency; virtual shelf extension; increased customer convenience	Increased customer convenience
Challenges	Fixed costs for bricks-and-mortar presence; limited assortment/item range and shelf space	Cross-channel IT requirements; increased in-store handling effort; shipping costs for click-and-collect	Picking costs; lead time; potential shipping fees; handling of bulky items
Relevant forward distribution concepts	In-store buying	Click-and-collect; Click-and-reserve	DC shipment; drop shipment; store shipment